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Time Warner Boosts Forecast -- WSJ

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November 03, 2016

By Anne Steele and Keach Hagey

Time Warner Inc., which two weeks ago agreed to sell itself to AT&T Inc., raised its outlook for the year and reported solid third-quarter results, powered by growth in its cable TV and film businesses.

Revenue and operating income increased in all three of the company's segments -- Turner Broadcasting, HBO and Warner Bros. Cable channels were boosted by higher monthly subscription fees, while the film studio was helped by the strong box office performance of movies like "Suicide Squad" and "Sully."

Revenue and profit came in ahead of Wall Street's expectations.

AT&T late last month reached a deal to buy Time Warner for $85.4 billion, which would transform the phone company into a media giant. The companies anticipate the transaction -- for $107.50 a share, evenly split between cash and stock -- to close by the end of 2017.

The strong results highlight why AT&T was willing to pay such a high premium -- 36% above where Time Warner's stock had been trading before news of the merger began to emerge. Wall Street remains skeptical that a deal will pass muster with regulators, with Time Warner shares trading about 17% below the current value of the offer.

Time Warner shares were down slightly to $88 in mid-morning trading.

On a call with analysts, Time Warner Chief Executive Jeff Bewkes pushed back against the notion of regulatory risk, saying the merger would have "competition-spurring" advantages by creating more types of TV packages available to consumers and more and better advertising options for marketers.

In particular, he argued that the merger would give advertisers more options amid "an increasing concentration of digital advertising in just a few companies," namely, Facebook and Google. He added that both Time Warner and AT&T have a "very significant commitment" to meet conditions that might be placed on the merger by regulators.

Time Warner executives said they are still reviewing which Federal Communications Commission licenses would have to be transferred to AT&T as part of the merger -- a process that would give the FCC jurisdiction to review whether such transfers are in the public interest.

"There aren't what we would call material licenses that are the bedrock of our business," said Paul Cappuccio, general counsel of Time Warner, on the call with analysts.

Mr. Bewkes declined to answer a question about whether Time Warner had received takeover interest from othercompanies besides AT&T, saying, "Let's focus on AT&T."

The combined business would pair the telecom giant's millions of wireless and pay-television subscribers with Time Warner's deep media lineup, which includes networks such as CNN, TNT, the prized HBO channel and Warner Bros. film and TV studio. It furthers AT&T's bet that television and video can drive growth in a saturated wireless market.

Like all media companies, New York-based Time Warner has been grappling with subscriber declines as more people cut the cable cord and opt for online streaming. In an effort to turn the tide, Time Warner last year launched HBO Now, its stand-alone streaming service for the channel featuring popular shows such as Game of Thrones.

But this quarter's results show how, so far, Time Warner is managing to offset subscriber declines by hiking the prices it charges pay-TV distributors for carriage of its networks. Those fee increases are generally baked into long-term contracts.

At the Turner cable networks division, subscription revenues were up 12%, as higher rates in the U.S. and international growth offset a decline in U.S. subscribers and foreign-exchange impacts. Overall, Turner's revenue increased 9%, helped in part by a blockbuster election season at CNN.

Similarly, at HBO, revenue increased 4%, driven by a 5% increase in subscription revenue that the company said was driven by higher domestic rates and international growth.

At Warner Bros. revenue was up 7%, thanks to a string of hits.

For the September quarter, Time Warner reported a profit of $1.47 billion, or $1.86 a share, up from $1.04 billion, or $1.26, a year earlier. Excluding certain items, per-share profit rose to $1.83 from $1.25. Analysts polled by Thomson Reuters had expected adjusted earnings of $1.37

For the year, Time Warner now expects to post $5.73 to $5.83 in adjusted earnings per share, including a 28-cent net tax benefit recognized in the third quarter related to a change in a tax-accounting method. Minus that benefit, the outlook for 2016 adjusted earnings would be $5.45 to $5.55 -- still a healthy raise from the previous forecast for $5.35 to $5.45.

Write to Anne Steele at Anne.Steele@wsj.com and Keach Hagey at keach.hagey@wsj.com